Cutting your losses
Most of the time, if you are lucky enough to hear anything about cutting losses - you hear something vague like “cut your losses if it drops 5%.” In a vague way, that is good advice. It at least gets you out of a losing trade. However, you can still lose all your money in a week or two following this rule. For example, if you put all your money plus margin into one stock and it drops 5% - you are down 10%. Do this a few times in a row and you are out about 30%.
A better way is to limit your loss for each trade based on your portfolio size. For example, a 1-2% maximum portfolio loss on each trade, and you can last a long time - especially if you let your winners go as far as they can.
I made a lot of mistakes before I understood this, and I continue to make mistakes even though I know this much.
But I did win at poker tonight - rockets again!
